Washington Notebook: Optimism exists despite 2Q GDP downgrade

Tuesday, October 02, 2012

The U.S. economy performed worse in the second quarter than originally thought.
The Bureau of Economic Analysis within the Commerce Department now says real gross domestic product grew 1.3 percent during the quarter instead of the 1.7 percent previously estimated.
In the first quarter, GDP grew 2 percent.
The deceleration in real GDP in the second quarter was related to a slower growth in personal consumption (1.5 percent vs. 2.4 percent in the first quarter), and non-residential and residential investment. Keeping the decline from being worse were exports (5.3 percent vs. 4.4 percent in the first quarter) and smaller decreases in government spending at all levels.
Import growth also tailed off to 2.8 percent from 3.1 percent in the first quarter. That helped the GDP figure stay higher because imports are subtracted from GDP because the spending wasn't used to produce anything in the United States.
The economic news is such a mixed bag right now. Unemployment remains stubbornly high, the European financial crisis continues to fester and create uncertainty, and the United States is facing a big crisis with automatic budget cuts at the end of the year that could tip the country back into recession.
Businesses are sitting on huge piles of cash from strong earnings periods, but the uncertainty makes them unwilling to invest and hire.
But if you look beyond the clouds there are some rays of progress.
Surveys last week showed consumer confidence increased to its highest level in seven months.
According to Steve Rattner, a Wall Street financier who headed the Obama administration's auto task force that managed the government's rescue of the auto industry, consumer confidence is at the same level as October 2009, when people thought the economy was coming out of recession.
What's going on?
For one thing, Rattner said on MSNBC's "Andrea Mitchell Reports" daytime program, growth in real disposable income during the past six months has been strong. People feel they have more money in their wallet than before, even if in absolute terms their cash flow has not returned to previous levels.
Housing prices have started to turn around after hitting bottom. Housing prices are up 5.6 percent so far this year versus last, the best improvement in two years, the chairman of Willett Advisors said.
There is a growing sense among economists and average Americans that the housing market is starting to make a real recovery and housing drives so much economic activity, from remodeling, to home improvement and furniture purchases, to new construction. Meanwhile, the inventory of houses on the market is starting to come down, which is strengthening prices.
Finally, the stock market is booming. During the Obama administration the stock market has more than doubled in value and is up 14 percent so far this year.
As their stock portfolio's increase in value, people feel wealthier and are more willing to spend money beyond things considered essential.
There are still a lot of headwinds, but if we can get Congress to agree to some mechanism to forestall massive budget cuts at a fragile economic time, the U.S. economy should continue to gradually improve and maybe pick up speed after next year. - Eric Kulisch